“Retroactively changing the rules is deeply unreasonable,” State Senator Ted Lieu, a Democrat from Torrance, CA, complained in a Jan. 28 letter to Selvi Stanislaus, executive officer of the tax board. “The legislature that enacted the [qualified small business] tax incentive would NEVER have intended taxpayers to rely on the law for years, then sock it to them by retroactively taking the benefit away.”

Lieu’s letter comes as a new lobbying group, California Business Defense, is organizing a campaign to block the changes through administrative and legislative channels in Sacramento. “We are here to fight this retroactive tax and ensure that California continues to be a bastion of business and job creation for years to come,” the group states on its website.

The organizing committee of California Business Defense includes Brian Overstreet, the CEO of AdverseEvents.com, whose Jan. 15 commentary in Xconomy first brought widespread notice to the FTB’s new policy.

“When something is wrong, we have an obligation to fix it,” says Overstreet (pictured above right). “In the coming weeks we’ll be working with other affected taxpayers to have this wrong righted… We’re actively encouraging anyone facing a FTB retroactive tax bill from their qualified small business tax exclusion or deferral to seek tax and legal counsel and to reach out to us through the site if they want to participate in the process of change.”

Other members of the organizing committee include CEO Phil Dunkelberger, CEO of Palo Alto, CA-based Nok Nok Labs; Jim Fowler, CEO of San Mateo, CA-based InfoArmy, and Bruce Hansen, board chairman at San Diego-based Brightscope.

All four men formerly led and sold large tech companies: Dunkelberger was CEO of PGP (acquired by Symantec in 2010), Fowler was CEO of Jigsaw (acquired by Salesforce.com in 2010), Hansen was CEO and chairman of San Diego’s ID Analytics (acquired by LifeLock in 2012), and Overstreet led Sagient Research Systems (sold to Informa in 2012).

As such, they’ll all be subject to additional assessments from the FTB, to the extent that they took advantage of incentives that allowed taxpayers to exclude or defer gains on the sale of stock in a “qualified small business” (QSB) with 80 percent or more of its operations in California. Hansen told U-T San Diego the changes will cost him several hundred thousand dollars.

The FTB says it was forced to invalidate the incentive by a 2012 Court of Appeals ruling. In the case of Cutler v. Franchise Tax Board, decided last August, the court found that the 80 percent requirement represented an unconstitutional restriction on interstate commerce, since investors in multistate companies weren’t allowed to take the tax break.

To remedy the situation and treat all taxpayers equally, the FTB says it has no choice but to collect the taxes people would have paid if the deferral and exclusion options hadn’t existed, going back to 2008 (the most distant tax year that’s still open to new assessments under the statute of limitations).

Lieu argues in his letter to Selvi that the FTB is going overboard by insisting on the retroactive payments. “Taxpayers changed their behavior to take advantage of the QSB incentive, and this change helped California but spurring new investments in start-up companies and small businesses,” Lieu writes. “It is unfair for California and its state government, which benefitted from this policy, to now retroactively change the rules.” Lieu ends the letter by urging FTB to reverse its decision.

There’s no word yet of any formal legal challenge to the FTB decision, or of any attempt to circumvent it through new legislation. But Assemblyman Jeff Gorell, a Republican from Camarillo, CA, told the U-T San Diego last week that “This is something we’re going to address.”

Overstreet says California Business Defense has hired the Washington, D.C. lobbying form of Petrizzo Bond to orchestrate opposition to the FTB decision in Sacramento. Phil Bond, the president and CEO of Petrizzo Bond and former CEO of the powerful tech industry lobbying group TechAmerica, is leading the firm’s effort.

“The last two weeks have been overwhelming and I’m truly grateful for the widespread support I’ve garnered from all ends of the political and economic spectrum,” Overstreet tells Xconomy. “Most everyone seems to understand that what the FTB has done with this retroactive tax flies in the face of the state’s need to foster and support entrepreneurship and new business development. I’m especially grateful to some of the early movers who have stepped up to work with me on affecting change on this matter.”

It has always been my opinion that the USA was the home of business and the creator of opportunity, This article by Wade Rush is actually quite shocking to me as an investor/business owner in the UK, I thought that the UK was anti-business in many ways but to discourage start-up entrepreneurs is a naive policy in the very least. Good luck Wade with your California Business Defense initiative.

Patrick Vivier

The plight against small businesses in this country is endless. Little do people realize that the entrepreneurial firms carry this great nation. Without them America wouldn’t be the same.